What is it?
The ARK Venture Fund, ticker XARKX, is an actively managed fund which seeks to offer access to an illiquid market such as Venture Capital, to every type of investor. It was launched during the last week of September 2022, during a difficult period for ARKK, this has raised many criticism on Cathie Wood’s investing strategy. For this particular fund, the target companies are the ones that lead and can benefit the most from cross-sector innovations, such as artificial intelligence, blockchain, robotics and energy storage. This fund is optimal for investors who have an investment horizon of at least 5 years. It targets many public and private companies, ranging from Discord, Epic Games and Twitter, to Shopify, Tesla and Nvidia. It is necessary to highlight that it is not commonly traded on any exchange, but it’s an interval fund, which is a specific type of closed-end mutual fund that only allows investors to redeem shares periodically in limited quantities; we will see later what it means.
Some key numbers: the Net Assets are $10.9 million, with a Net Asset Value of $18.37 as of 12/08/2022. The weighted average market cap of the companies in the portfolio is around $64 billion, with a median value of $8 billion. 80% of the companies have between $2 and $100 billion market capitalization.
Why is it different from usual VC?
There are many differences: as we said before the VC market is quite an illiquid one and usually it locks money for many years, while this fund provides investors with the possibility to redeem capital at 5% of NAV per quarter. Another difference lies in the clients this fund reaches, since Venture Capital funds are usually available to qualified purchasers, a type of investors who manage at least $5 million, this creates a problem for almost every private investor who manages a small amount of money. Common VC funds exit after an IPO and they are not exposed to long term success of a company, while this is possible with the ARK fund, even if most of the times an IPO generates an overreaction from the market and the price increases too much, entering the expectations treadmill and ending up underperforming. Another peculiarity is that traditional VC funds invest most of the time only in private companies, however this does not apply for ARK.
Criticism
First of all we need to talk about the fees: the expense ratio is 4.22%, which is really high, this is topped by a management fee of 2.29%. Such a high ratio is explained by Cathie Wood as reasonably fair compared to other VC funds and she suggested that in the future these fees could come down, supported by the theory that “you can always cut fees but never raise them”.
Secondly, for all the private companies, which in normal conditions make up the 70% of the entire fund, there isn’t a daily pricing and the fund relies on the company’s own fair calculations, which are described in the SEC filing states as probably different from the value that could be realized upon the sale of the security. Looking at the outlandish previsions Wood made for different stocks this could create large discrepancies (this is the reason for private markets being available only to accredited investors).
It’s much more accessible than it’s excitable. As we said before it is not tradable day to day, shareholders could sell just a portion of their shares back to the fund at a price based on the net asset value. There is the possibility that the main goal of this fund is to make ARK earn via fees, and has no longer terms horizons, however this is just an hypothesis.
Top Holdings
The fund has 3 main components: private companies, which account for
47%, public companies, which account for 38% and last but not least cash holdings, for 15%. For the moment Twitter occupies the largest share, accounting for 9%. The 12 public companies in the fund will be familiar names to Wood investors. Half of the Venture fund’s publicly traded investments — Zoom, Tesla, Roku, Block, Twilio and UiPath — are in ARKK’s top 10 holdings by weight, according to a Citywire review of the strategies’ portfolios. The Venture fund and ARKK also both hold shares of Shopify, Coinbase, Roblox, DraftKings, Unity Software and Nvidia. The public-private crossover fund is available exclusively through Titan, a retail investing app backed by venture capital firm Andreessen Horowitz. The portfolio is exposed almost totally to North America (95%) and just a little bit to Europe.
Factorial Analysis
Here we try to explain the returns of the fund by breaking market movements of the underlying asset into its fundamental constituents. For this analysis we used the six-factors Fama-French-Carhart model, one of the most famous asset pricing models which adds size risk (SMB), value risk (HML), profitability risk (RMW), investment risk (CMA) and momentum risk (WML) factors to the market risk factor (MKT). One point to make before going further with this analysis is that being the fund quite recent we do not have tons of data, however we believe that the last 3 months are sufficient for our purposes.
From the image above we can see how this model is effective for the performance, since the R-squared value is 0.944, so the 94.4% of the variance in the last 3-month performance we got can be explained by this model. Even the adjusted R squared, which overcomes the overfitting problem, has a really high value (>0.9) and confirms the results obtained by R squared. The Prob (F-statistics) is necessary to assess whether all the regression coefficients are zero (null hypothesis) and a low value implies that the possibility of the hypothesis being true is low, supporting the strength of our results.
The Market factor has a coefficient of 1.1, which tells us that the fund moves in the same direction of the market and for every 1% that the market rises, the fund will move up by 1.1%. This factor is the most significant one, since its t-value is 12.744, which is considerably higher than 1.96, we will see that the other factors are less explanatory, probably as a consequence of too few observations. Even p-value is 0 meaning that the hypothesis that the variable has no influence on the performance is rejected.
Before going further with the other factors we see that all the t-values are lower than 1.96 and all the p-values are higher than 0.05, which means that the results are less reliable and the error implied by the limited number of observations could be strong.
However we see that the fund is negatively correlated with the SMB factor, the RMW factor and the CMA factor, while the fund has positive correlation with the HML factor and the momentum factor.
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